Best withdraw strategy during retirement to maximize your profits
Did you know that if you take money out of your retirement account in the wrong order it can potentially cost you hundreds of thousands of dollars?
If you are unsure of what order you should be withdrawing from your retirement accounts or how much you should be withdrawing from your retirement accounts.
What’s up everybody this is Positive Finances where we talk about everything and anything that involves you and your money.
Research shows that people who seek out help and get educated about the ins and out of investing and handling their money during retirement feel more confident about being able to retire, and not only do they feel more confident they also end up with more money in their retirement accounts.
I am going to show you the top two mistakes when preparing for retirement. Pay close attention to this, because the more aware you are the easier retirement life will be for you, and the easier it will be to prevent having to go through years of unnecessary stress and regret.
Mistake # 1 = Withdrawing from your accounts in the wrong order.
Many tax professionals will suggest withdrawing first from your taxable accounts first. For example, if you have money invested in a brokerage account like Robinhood, Webull, or other non-retirement investment accounts you will withdraw from these accounts first until they are down to zero. Second, you will withdraw from your tax-deferred accounts like your traditional 401k or your traditional IRA’s until they are down to zero. Third and last you will withdraw from your Roth accounts, like your Roth 401k and your Roth IRA’s. This method will allow your Tax-free Roth accounts to grow more and more over the years through compounding interest.
Keep in mind you can start withdrawing money from your 401k’s and IRA’s when you turn 59 1/2, but that doesn't mean you have to. The law doesn't require you to start taking a Required Minimum Distributions out until you turn 72, so this gives you time for your 401k’s and IRA’s to keep growing for extra years.
Another important point to keep in mind is all non-retirement investment accounts and your tax-deferred accounts are taxable. That means you are going to have to pay capital gains taxes on withdrawals, so make sure to reach out to a financial advisor or your tax accountant to help you understand how much you will need to pay in capital gains tax each year.
Mistake # 2 = Withdrawing too much out of your accounts each year.
To avoid running out of funds within your retirement account it is highly recommended to follow the 4% rule of thumb. It is super simple to calculate. All you must do is add all your investments and withdraw just 4% of your total during your first year of retirement. As the years go by you simply adjust the amount you withdraw based on the national average inflation rate. If you follow this 4% rule of thumb your money should be able to last you at least a good solid 30 years.
Let me give you an example, to help you understand it better. Let’s say you add up all your 401k’s, IRA’s, and any other investment accounts you have. The total of all those accounts adds up to $1 million. 4% of 1 million comes out to be $40,000 for your first year of retirement.
Now listen closely to this next part because if you mess up this step you are going to run out of money real fast. Let’s say on year 2 of retirement the average national inflation rate is 2%, then that means you would give yourself a 2% increase. The extra 2% is not 2% of the total $1 million. The 2% is calculated from the baseline $40,000. That means if you calculate what 2% of $40,000 is, then that gives you an extra $800. You will now withdraw a total of $40,800 for the second year you are retired. As the years go by you will continue this same process of withdrawing the previous years amount plus the new inflation rate adjustment for the next 30 years.
I understand that not everybody is in the same situation and there are some exceptions for people, so make sure to cross-reference your withdrawal numbers with a financial advisor you can trust so that they can help you stay on track.
I hope this helps you get a better understanding on how to properly withdraw from your retirement accounts and help you get the most out of your retirement investments.
